Monday, June 11, 2012

Disbelief Not Suspended

At least not by Mr. Market. Spanish 10 year. Italian 10 year. ECB can continue to offer the internal banks money to invest in their own sovereign bonds, but it's not as if outside money is rushing through the door.

Can ANYONE figure out how Spain escapes another downgrade and how those banks can ever access external private funds after this? If Spain has to sign the note, doesn't that shove up their Maastricht debt?

Meanwhile, back at the US reality ranch, our fearless leader claimed on Friday that the private sector was thriving but that the problem was with government jobs. Oh, really. Since January of 2006, the US economy has essentially gain NO private sector jobs and NO government sector jobs. The recent shortfall of government jobs is just bringing the government jobs back in line with the private sector:

Now if you are lying on the floor groaning, thinking "No net job creation in over six years?????" your sentiments are entirely understandable. Also the screaming, wailing and gnashing of teeth.

However fixing this by borrowing more money to add jobs that cannot be maintained long term is about as crazy a plan as plans get. It reminded me of this scene in a modern classic. I do believe this pretty much conveys the average American's reaction to Obama's presser:

A little more background as to how the balance of government and private spending and revenue has shifted over the years:

This graph expresses all numbers as a ratio of GDP. The purple line is total government revenues (federal, state & local.) The pink line is government spending.The orange and red are two different measures of federal receipts. The blue line is state and local government revenues. Obviously, a constrained private sector cannot continually keep paying larger and large state and local taxes without hurting the economy!

This graph shows revenue splits. Purple and orange are the same. The green line is state and local. The bottom blue line is corporate tax receipts. The yellow line is receipts from social insurance taxes. The green line is state and local receipts.

This graph shows all this in relation to federal debt held by the public. We're running out of room.

Y'know, you've got a point there. Arithmatically, you can do that. Cause inflation and then destroy the money to bring the economy full circle, I mean. If a person were to take a nap at the beginning of the cycle, and sleep until the end they would wake up with their savings unaffected. The question is what happens to ongoing operations and investment decisions in the meantime.

Ideally we would all like a larger private economy, which would then support our pensions and the government jobs without requiring an ever-larger share of the pie to do so.

But if you create and destroy money, you are deliberately screwing with the business cycle. You can do a little of this without too much effect, but of course it is never tempting to do a little, because you want a large effect.

We've been deliberately creating money and then accidentally destroying it for about three decades, and the only result is to make us all poorer and load us with debt.

The Fed just reported a massive fall in household wealth from 2007 to 2010. No shit, Sherlock. But the problem is that the debt doesn't go totally away, and the fake value inserted in the system really hurts those who have to buy in at the wrong time. And it may hurt them for decades.

It's kind of like eating a gallon of ice cream on the weekend because you plan to start your diet on Monday. Fun while it lasts, but if you keep doing it, you always wind up fatter over the long term.

Cause inflation and then destroy the money to bring the economy full circle, I mean. If a person were to take a nap at the beginning of the cycle, and sleep until the end they would wake up with their savings unaffected.

I would counter with an example.

1. I save one hundred $1 bills. Since interest rates are 0% on 3-month treasury bills, I opt to simply bury the bills in the backyard.2. Krugman advises to inflate so that my avings are only worth $50.3. Mankiw then advises to physically destroy half of what's left. While I am sleeping, black helicopters land in my backyard, dig up my money, and stamp "NULL AND VOID" on half.4. And lastly, there is a currency crisis as I tell two friends about what Krugman and Mankiw did to me, and they tell two friends, and so on, and so on.